Zulaikha Brey and Sifiso Mhlaba

Why are SMMEs important?

Globally, the Small, Medium and Micro Enterprises (SMMEs) sector has long been recognised as a key driver of economic growth, and more importantly, as major source of employment. For example, a recent World Bank study found that “relative to larger firms, SMMEs enhance competition, entrepreneurship, job growth and spur economy-wide efficiency, innovation, growth and poverty alleviation”. Given the extraordinarily high unemployment rate in South Africa, and the fact that SMMEs are generally more labour intensive, it is not surprising that this sector has been the subject of significant research and support. This has culminated, most recently, in the establishment of a dedicated Government Ministry and Department to address small business issues. Based on some of our recent work with the SMME sector, there is no shortage of concerns that will demand the Minister’s attention.

The new Department of Small Business Development will not emerge into a vacuum. There are already a vast array of national, provincial and municipal policies and agencies geared towards SMME development. The main forms of this public sector support include:

· Specific tax allowances for SMMES;

· A lower regulatory burden (SARS, BBBEE, company reporting etc.);

· Various programmes to provide improved access to financing (grants and loans);

· Numerous incentives, most of which offer specific and additional benefits to SMMEs; and

· Multiple development agencies and business incubators which provide technical assistance and in many cases financial support.

These efforts have seen some success. By late 2012, 73% of employed people worked for firms that employed fewer than 50 people[1], contributing approximately 60% to the national gross domestic product (GDP).

But despite this support and the apparent strength of the domestic SMME sector, many challenges remain. There is vast literature on this topic which we will not attempt to review here. Rather, this article is limited to our real-world observations, based on our own interactions with a sample of SMMEs as part of an independent research study. Specifically, over the last few months, we met with over 90 SMME beneficiaries of government assistance across five provinces to ask them whether and how their needs are being addressed; and what more could be done by Government to improve interventions aimed at SMME development.

Without hesitation, most respondents stressed that vast strides have been made in the development of the sector, and readily acknowledged that they would not have grown or survived without the assistance received from government and industry. However, in the same breath, these respondents are quick to point out numerous challenges. Most of these are not new, but for the sake of the Minister, we think three sets of issues deserve repeating.

1. Access to finance

As would be expected, the availability of affordable funding remains a primary concern, despite the vast amounts of money government is pumping into the sector. When pressed for more information, the respondents identified three specific gaps.

Firstly most entrepreneurs have no track record and, understandably, are not be able to secure start-up capital from private banks. However, they also and often do not meet the strict qualifying criteria imposed by public sector funding programmes. This is largely because these criteria are usually generic and not sufficiently flexible to respond to unique opportunities in this sector. For example, most applications for assistance require that the entrepreneur provide audited annual financial statements and have internal control systems in place. For an emerging entrepreneur, with low levels of financial skills and resources, this may be an unrealistic expectation.

Similar problems often emerge further down the business development path, in that nascent SMMEs are unable to obtain expansion capital without secure collateral or guaranteed earnings. Rather, many growing SMMEs find themselves in the “missing middle”, where they no longer qualify for grant funding from government but remain too risky for commercial banks.

Finally, even when an SMME does qualify for grant or expansion finance, these funds are usually restricted to the financing of capital assets (and paid directly to a third party). When SMME support programmes do provide the working capital needed to operate a business (direct funding), it is often limited and ring-fenced for specific activities; and the resulting lack of cash flow contributes to the demise of most SMMEs.

These issues are not unique to South Africa and the capacity of Government to fund new businesses is rightly limited. However, given these limitations, Government needs to work more smartly, in partnership with the private sector, to ensure that the right businesses are getting the right form of financial support, at the right time. Our brief interaction with current SMME programmes and beneficiaries suggests that this is not the case; there is evidence of substantial wastage in the system.

In addition, Government has a direct role to play as a buyer of goods and services from SMMEs. Delays in payments from Government can quickly rupture the shallow pockets of most small businesses. Whereas new systems have been put in place and our own experience as consultants working for Government suggests that major improvements have been made, complaints and problems persist. Here too the new Department could play a valuable role in monitoring the performance of other Government departments and naming and shaming those that do not comply with agreed payment standards.

2. The Regulatory Burden

South African entrepreneurs complain that red tape and bureaucracy constrain their ability to adapt and grow. Small businesses, in particular, battle to keep up with the raft of regulations imposed on them and are less able to overcome the cost of compliance.

South Africa is reported to have some of the most inflexible labour laws in the world. For an SMME, which hires employees as and when the need arises, the ability to respond positively (and in some case negatively) to fluctuations in the number of orders received or revenue and profit generated is critical to their survival. This is compounded for those businesses which produce seasonal goods, most notably in the agriculture sector. The Minister should consider working with the Department of Labour to review current labour laws, specifically as they apply to labour-intensive SMMEs, in order to provide them with increased flexibility when it comes to the hiring and firing of workers.

Similar challenges are likely to occur across a much wider range of regulations, including those relating to employment equity, BBBEEE, taxation, company registration, skills development (i.e. SETA contributions). Whereas concessions have been made in some of these areas for smaller businesses, the combined cost of compliance remains high, and this too deserves a serious and comprehensive review.

3. Fragmented support programmes

All the SMMEs we met have been fortunate to have accessed at least one government funded initiative. However, despite the benefits received, a significant number indicated that the assistance is not comprehensive. Often they receive finance, but no accompanying training, or they receive training, but find they are unable to access other government incentives. For example, a chemical company that we met, which received funding and training to develop a new product, was denied access to official export assistance incentives. The resulting funding or training received is subsequently not used optimally.

In other cases, SMMEs benefiting from one government programme are penalised by a policy in another area. For example, a craft firm that received finance for capital assets, was required to pay a high import duty on the purchase of the foreign inputs used in the machinery. In this instance, trade policies designed to protect a few, large established firms have the unintended consequence of increasing barriers to entry for SMMEs.

The Department of Small Business Development would be well-advised to undertake a rigorous review of existing support measures in this sector, and how they relate to each other (or not), before rolling out any further assistance.

How do we move forward?

The establishment of the Department of Small Business Development (SBD) has the potential to shake-up government support to this sector. While some may advocate for an overhaul of existing SMME development strategies and programmes, we don’t believe such steps are warranted. There are already multiple public, private and civil society initiatives in place; many of which are having positive results. Rather, the Department of SBD could play a central role in coordinating all of these SMME interventions across Government; and dealing with the many barriers to SMME development that Government itself imposes on the sector. Without adding to the growing list of demands on this new Department, we would suggest that the Minister does some homework before she leaps into the fray. Specifically, we would propose that she considers:

· Reviewing the focus, size, effectiveness and potential overlaps between all government SMME programmes that are already available; and comparing this vast network of support to the actual needs and general awareness of South Africa SMMEs on the ground.

· Revising the regulatory framework and how it applies to SMMEs, by working across Government to identify and tackle those regulations that impose a particularly high compliance and/or reporting cost on small businesses.